Paste your Google Webmaster Tools verification code here

Economics has a lesson for Remainers and lockdown-lovers who refuse to let facts change their minds

Economics has a lesson for Remainers and lockdown-lovers who refuse to let facts change their minds

Christmas is a time to be charitable.

So let’s spare a thought for those who fought against the referendum result.

Unlike the great unwashed, who simply didn’t understand the issues they were voting on, they had all been expensively educated at the right sort of schools and universities.

From the time the vote took place in 2016 right up until the day of Boris Johnson’s decisive victory in the election a year ago, a ruthless campaign was waged to nullify the vote.

How smart do they look now, all those Amber Rudds, Dominic Grieves, Gina Millers and Jo Swinsons?

They could have accepted the result and voted through one of the many versions of a deal proposed by Theresa May. Most of these involved a close and ongoing alignment with the EU.

Instead, they will end up with an arrangement which is the stuff of their nightmares.

Spare a thought, too, at this festive time for the hapless first minister of Wales, Mark Drakeford.

Towards the end of October, he placed Wales in a short “fire-break” lockdown to try to reduce its high infection rate. Sections of supermarkets were cordoned off by government diktat because they sold “non-essential”  items.

The seven-day moving average of daily new cases did indeed fall in Wales from around 300 per 100,000 to well under 200. But within a month of lifting the fire-break, it had risen even higher, to some 350. In the old mining valleys of South Wales, the new case rate is now 600 and rising.

Drakeford did what any self-respecting Corbynite would. He blamed the electorate.

On 10 December, speaking on BBC Breakfast, he remarked: “Not everybody has been willing to abide by the restrictions that are still necessary. We have seen people having house parties, people inviting large numbers of people back to their own houses when that is absolutely not allowed within our rules.”

His words recall the leaflets put out by the old East German Communist government in June 1953, after the workers’ uprising had been brutally suppressed by Soviet tanks. The people, they declared, had forfeited the confidence of the government. It could only be regained by “increased work quotas”.

The Welsh government followed the advice of experts in epidemiology, for whom no lockdown appears to be sufficiently strict.

But these experts did not anticipate that lockdown would make ordinary people less, rather than more, likely to behave in ways the experts deem appropriate.

These two vignettes — lockdown and the anti-Brexit movement — illustrate fundamental principles expounded by Friedrich Hayek and Herbert Simon, both Nobel laureates in economics.

They stressed the need to recognise the highly tentative, uncertain and experimental nature of successful decision-making. It is an evolutionary process, rather than one which can be optimised.

Good policy proceeds by trial and error. Rather than try and find the best possible solution — such as overturning the Brexit result — choose one which seems reasonably satisfactory.

Another key point is that failures need to be abandoned quickly. Lockdowns no longer seem to work, but experts continue to be fixated by them.

The works of Hayek and Simon should fill the stockings of Remainers and epidemiologists alike this Christmas.

As published in City AM Wednesday 16th December 2020
Image: EU flag mask by Ivan Bandura via Wikimedia CC BY 3.0
Read More

Forget the polls endorsing lockdowns and look at how people actually behave

Forget the polls endorsing lockdowns and look at how people actually behave

Economics is at long last storming the bastions of the Scientific Advisory Group for Emergencies (SAGE).

This citadel of epidemiologists and health professionals has for many months resisted the lessons which the so-called gloomy science can bring.

In the context of Covid-19, economics is in fact a beacon of hope.

This week, news broke of a report commissioned by SAGE from Barry McCormick, a former chief economist at the Department of Health. It shows that the benefits of lockdowns are greatly exceeded by the costs they create. On the government’s own standard cost-benefit criteria for judging policy, they should not be imposed.

But If the only tool you have is a hammer, everything looks like a nail.  And the scientists of SAGE only seem to have lockdowns in their kitbags.

Economists have warned of the unfavourable cost-benefit impact of lockdowns for months.

At the end of June, David Miles, a former member of the Monetary Policy Committee, produced a very detailed report showing that even if the first lockdown had saved 500,000 lives — the estimate of professor Neil Ferguson at Imperial, and a figure Miles regarded as absurd — the costs of it were even greater than the value of the lives saved.

Indeed, back in early April, Gerard Lyons and I (while supporting the initial lockdown) laid out our plans to chart a way out of it. We urged the government to do so quickly, precisely because of the costs to the economy and society which lockdown created.

And the government appeared to agree. Rishi Sunak designed his job support schemes on the assumption that the country would soon be opening up for business again, winding down furlough and focusing on how to get the economy moving again.

Then as summer ended, the government was essentially railroaded back into a lockdown strategy by the panic-inducing charts produced by the scientists. The massive inaccuracies of the graphs flourished by Chris Whitty and Patrick Vallance on 21 September simply cannot be emphasised enough. On their projection, there would now be nearly 200,000 cases a day  in the UK. There are actually only around 20,000.

But once the graphs had been released, the government was backed into a corner by public opinion. Opinion poll after opinion poll apparently showed strong support not only for whatever lockdown measures were in place, but for them to be strengthened.

What is the government to do in the face of such a pro-lockdown public?

Here, as it did over the summer, economics can again come to the rescue.

A fundamental concept of economic theory is that of revealed preference. People’s preference can be most reliably inferred not from the answers given to questions in surveys, but from the actual decisions which they make and the actions which they carry out.

Even the scientists on Sage are beginning to grasp that, in practice, the strictures of lockdowns are widely ignored, despite the answers people give to surveys.

For example, while huge majorities will earnestly say they support long isolation periods for Covid sufferers and their contacts, the data shows that barely 10 per cent of people in these categories are actually following the rules. As a result, the quarantine period may soon be reduced to just seven days, in the hope that people will be more likely to stick to the rules if they are less harsh.

Overall, the preference revealed by the British public is that they have had enough of lockdowns. That is not to say that they do not care about reducing transmission — they understand the need to change behaviour.  Many of the over 70s are shielding effectively, while young people are beginning to grasp the implications of unrestrained mingling and are modifying their actions. But when the rules are clearly overly strict, counter-productive, or downright bizarre, people pay less attention.

The government should rely on economists and not epidemiologists to get us out of the crisis.

As published in City AM Wednesday 28th October 2020
Image: Stay Safe sign via Flickr  CC BY-NC-SA 2.0
Read More

Why you should read the small print on alarmist Covid-19 death projections

Why you should read the small print on alarmist Covid-19 death projections

Another day, another lurid, headline-grabbing number of deaths to expect from Covid-19.

This time, it was a study from the Academy of Medical Sciences. A second wave, we were warned, could kill 120,000 this winter in hospitals alone.

To be fair, this study was a projection rather than a forecast. A forecast is what is thought to be the most likely outcome.  A projection looks at what could happen under a particular set of conditions.

The Academy essentially assumed that behaviour would revert to the same as it was before the crisis, with people acting as though the virus had never appeared.

The researchers made their assumptions clear. But entirely predictably, the media seized on the 120,000 figure for deaths. The qualifications made around that number faded into the background.

The plain fact is that the assumptions of the report were wholly implausible. Even if lockdown were lifted completely, behaviour is not going to immediately revert to exactly what it was before the Covid crisis. Will people shake hands? Of course not. The concept of  a typical way of life has irrevocably changed.

The entire history of the world can be cited in evidence of this proposition. In the face of an epidemic, people alter their behaviour. They do not need to be told to do so by governments.

Of course, how much behaviours will change is ultimately a matter of judgement. But it is one where the social sciences, including economics, can make a valuable contribution. Epidemiology is currently too important a subject to be left in the hands of the epidemiologists.

It is something of a mystery why the numbers churned out by various epidemiologists retain any credibility. Their models in general take no account of behavioural change when a pandemic occurs.

In March, we all remember the Imperial College study claiming that without lockdown there would be 500,000 deaths in the UK. This was ludicrous — and economists such as Gerard Lyons and I quickly attacked it.

In April, a very similar model was run on Swedish data. It claimed that there would be 40,000 deaths by the beginning of July. In fact, even with no lockdown, there were only some 5,000, the majority of which took place in care homes.

Forecasts such as these make economic forecasts seem like Platonic ideals of precision.

This is far from a mere spat between scientific disciplines. Poor models and their resulting projections can lead to poor policy decisions. They generate a wholly unwarranted climate of fear among the population. This reduces economic activity, meaning less money available to fund health services, and greater poverty with its associated illnesses such as depression.

The number of deaths in England and Wales peaked on 8 April. The average time from infection to death tells us that the number of cases peaked in the week 18–25 March.  Lockdown was only introduced on the evening of 23 March. This shows that behaviour had already altered dramatically.

No more credence should be given to epidemiological projections which do not assume behavioural change.

As published in City AM Wednesday 22nd July 2020
Image: UK Government Coronavirus by Gustave iii via Wikimedia CC BY-SA 4.0
Read More

Economics could teach Theresa May a thing or two about tackling knife crime

Economics could teach Theresa May a thing or two about tackling knife crime
Knife crime continues to dominate the headlines. What can be done about it? Economics does not pretend to provide all the answers. But, perhaps surprising to some, it has a lot of useful insights to offer on crime. Gary Becker was a professor of both economics and sociology at Chicago. One day he was pushed for time, and weighed up whether to park in an inconvenient garage, or on the street right next to where he was going, risking a fine. This sparked his interest more generally into the costs and benefits of crime to the criminal. The result was a paper in the Journal of Political Economy in 1968 which eventually won him the Nobel Prize in 1992. Becker’s theoretical work has generated a large number of scientific empirical investigations into crime by economists. Would capital punishment, for example, be a sufficient deterrent to reduce the number of knife murders? If execution reduced the number of murders, it would be morally wrong not to implement it. Sparing the life of the criminal would come at the cost of future innocent victims of other murderers. Economists have carried out many statistically-based investigations into this topic, mainly using data in the US. From a scientific perspective, it is an excellent source, as there is a lot of natural variability in the data. Some states have capital punishment, others do not, and the number of executions differs a lot across the former. On balance, although there is some evidence of a deterrent effect, it is not sufficiently strong to be conclusive. This is particularly the case given the rise in recent decades of gang culture. Young gang members face a non-trivial probability of death in any given year from both other gangs and members of their own. So capital punishment would just be a marginal increase in this probability. Steve Levitt, also of the University of Chicago, shot to fame in 2005 with the best-selling book Freakonomics which he co-authored. Given that a great deal of crime is committed by relatively unskilled men from single-parent families, Levitt showed that increases in abortion rates reduced the “supply” of such people, and so cut the crime rate. More pertinently in the current context of knife crime, Levitt describes the evidence on crime and police numbers as being “persuasive”. In urban environments, hiring an extra police officer generates benefits in reduced crime which exceed the cost of employing them. The “cost” to the criminal is the potential punishment, such as a prison sentence. But this consists of two elements: the expected length of sentence if convicted, and the probability of being caught in the first place. If the latter is low, even much stiffer sentences will have only a small deterrence effect. The evidence suggests that an increase in the probability of being arrested does reduce crime. Longer sentences can also work, providing that there is sufficient chance of being caught. The evidence from economics offers little comfort to the Prime Minister in her claim that police numbers play no role in the current spate of knife crimes in the UK.
As published in City AM Wednesday 13th March 2019
Image: Police via Wikipedia is licensed under CC BY-SA 3.0
Read More

What’s the point of economists? Look to America’s tech giants to find out

What’s the point of economists? Look to America’s tech giants to find out

Despite the dire predictions from the economics profession about Brexit, the UK economy is doing well.

Growth continues at a steady pace. An all-time record 32.4m people are in work. Unemployment has fallen to levels not seen since the mid-1970s.

In contrast, the Eurozone is on the brink of recession – and Italy is already in one.

Economists in the UK are overwhelmingly anti-Brexit. Yet the persistent failures of their forecasts do not seem to lead them to revise their views.

Of course, macro-forecasting is just one part of what economists do. Economics as a subject is fundamentally about the allocation of scarce resources. So economists clearly have a role to play in government, where politicians are constantly having to make trade-offs between what they would like to do and what funds are available.

Even so, we might reasonably wonder whether the massive expansion of the Government Economic Service (GES) under Gordon Brown has been worthwhile. Well over 1000 economists are now employed in the GES.

An altogether more positive view of the point of economists comes from across the Atlantic. The giant tech companies just can’t get enough of them.

Amazon, for example, has hired over 150 economists qualified to PhD level in the past five years. This makes Amazon’s economics team several times larger than the largest academic departments in America.

This phenomenon is the subject of a fascinating article in the latest Journal of Economic Perspectives by Susan Athey of Stanford and Michael Luca at Harvard. Athey was previously the consulting chief economist at Microsoft, and Luca works closely with companies such as Yelp and Facebook.

The close commercial links of the authors are typical of how tech companies are using economists.

Collaboration with the academic world is actively encouraged. But at the same time, as Athey and Luca point out: “the majority of economists in tech companies work on managerially relevant problems with data from the company, and many are in business roles”.

They work on a wide range of practical issues. For example, economists use both actual and experimental data to help decide whether to introduce new products and how to evaluate the impact of competitors.

There are important questions around evaluating not just advertising, but a whole range of marketing initiatives. The skills of economists are very useful in the design and analysis of randomised controlled experiments on these topics.

At the top level, economists get involved in the key strategic decisions of the business. At Microsoft, Athey herself worked on the strategy and empirical analysis of Microsoft’s investment in Facebook and the acquisition of Yahoo’s search business.

It is not all one way. At tech companies, economists have had to become familiar with modern analytical tools in machine learning and artificial intelligence. These are very powerful tools, but academic economists have tended to look down their noses at them.

In the UK, the government is the biggest employer of economists. In the US, it is the tech companies. The contrast shows that we have some way to go to catch up with the entrepreneurial spirit of America.

As published in City AM Wednesday 6th February 2019
Image: Amazon via Pixaby by Geralt
Read More

A ray of light in these dark days: Living standards have risen far more than we think

A ray of light in these dark days: Living standards have risen far more than we think

The media seems full of gloom at the moment. Chaos over Brexit, Saudi Arabia, potential nuclear escalation between the US and Russia – you name it, people are worried about it.

A ray of light is shone – an apt phrase as you will see – by the work of Bill Nordhaus, a Yale economist who was the co-winner of this year’s Nobel prize in economics, along with Paul Romer.

Over the past two decades or so, Nordhaus has worked mainly on integrating climate change into macroeconomic models, and was awarded the accolade for this research. He is no knee-jerk lefty in this respect. For example, he was a prominent critic of Nick Stern’s report on climate change, which was commissioned by Gordon Brown.

But in my view, Nordhaus should have been awarded the Nobel prize years ago for his brilliant work on measuring how well-off we all are.

The conventional measure of GDP per capita is widely criticised these days. But instead of just whinging from the sidelines about how economics is wicked and useless – sadly a common feature in modern critiques – Nordhaus actually tried to do something about it.

In 1972, he and James Tobin (another future Nobel laureate) developed the Measure of Economic Welfare. The two economists took GDP as their starting point. They adjusted it to include, for example, an assessment of the value of leisure time and the amount of unpaid work in an economy.

Taking these factors into account means we are better off than the conventional GDP measure suggests.

The most dramatic paper by Nordhaus, published in 1996, is on the seemingly obscure topic of the history of lighting. He analysed the topic over a vast time span, from the first sources of artificial light – the fires used by humanity around one million years ago – to the modern fluorescent bulb.

The focus of the paper was not the technology as such, but whether the standard ways of measuring the price of lighting captured the massive improvements in quality which have taken place, particularly in the twentieth century.

Nordhaus concludes that the traditional price indexes of lighting vastly overstate the increase in lighting prices over the last two centuries relative to quality. So the true rise in living standards has consequently been significantly understated.

The magnitude of the difference is vast. Nordhaus estimates that the price measured in the conventional way rose by a factor of between 900 and 1,600 more than the true price.

Bodies such as the Office for National Statistics receive information about the economy in current prices. If output in any particular sector has increased, a key task for them is to decide how much of that is due to a rise in prices and how much to a genuine increase in output.

Rapid quality change means that the conventional ways of doing this simply cannot cope. Price rises are overstated, and in consequence “real” changes in output and living standards are understated.

The implication of the apparently esoteric work Nordhaus did on lighting is that modern technology such as the internet has increased living standards far more than the official statistics indicate. Finally some news to be cheerful about.

As published in City AM Wednesday 25th October 2018

Image: Lightbulb by lenavasilevs via Pixaby is licensed under CC0 1.0 Universal
Read More